New eBook: The Long Economic and Political Shadow of History - Volume III. Europe and the Americas

Stelios Michalopoulos, Elias Papaioannou08 March 2017

Over the past decades, economists working on growth have ‘rediscovered’ the importance of history, leading to the emergence of a vibrant, far-reaching inter-disciplinary stream of work. This column introduces the third and final eBook in our three-part series which examines key themes in this emergent literature and discusses the impact they have on our understanding of the long-run influence of historical events on current economics. This volume focuses on the Americas and Europe and examines how events from history have helped shape their post-war economic identities.

The second half of the 20th century has seen an unprecedented increase in standards of living across the globe. It is natural that these post-war decades, which have heralded major technological breakthroughs, should have received lavish attention from economists, eager to understand the variation in economic performance across countries.

draws upon themes introduced in Volume 1 and Volume 2 as it travels from the Middle Ages to the 1980s, showing how moments of historical significance in European and American history have shaped both contemporary economic outcomes, political developments, and people’s beliefs and attitudes.

In part, the focus on the post-WWII evolution of incomes is an outcome of data availability– for example, the Penn World Tables, a standard source for internationally comparable (purchasing power parity adjusted) GDP estimates, begin as late as 1950. Additionally, comparable across countries education data is again available only after the 1960s (Barro-Lee dataset). A cursory reading of the international press coverage for this period would suggest that the variation in economic outcomes across (especially low- and middle-income) countries could be readily attributed to the world price fluctuations of natural resources and the implementation of (in)adequate policies generating success stories for some and failures for others. This view on growth would also echo the prevailing narrative in the academic circles of economists where a limited role (if any) is attributed to pre-WWII events and legacies. The growth literature focused on industrialisation, investments in large infrastructure projects and more recently in ICT and human capital accumulation. The role of history, culture, deep institutions, and geography was bundled in an “unknown” (Solow) residual.

But how much do we miss by ignoring the varied historical legacies across regions? The answer can be readily gleaned by looking at Figures 1a-1b, where we plot the relationship between aggregate economic activity in 1950 (1970) and 2014, respectively. Among the 55 (156) states for which we have data, variation in country-level economic performance in 1950 (1970) accounts for 89% (90%) of the variation in aggregate prosperity in 2014. Similarly, variation in the standards of living in 1950 (1970) reflected in estimates of income per capita explain more than 60% of the variation in standards of living as of 2014 (see Figures 2a-2b). Notwithstanding the power of growth-retarding or growth-promoting policies in shaping contemporary variation in economic performance, knowing a country’s relative prosperity ranking from 70 years ago looms large in explaining differences in income per capita today. And while capital accumulation (and improvements in human capital) are surely parts of the growth process, development accounting exercises point out that most of the variation in economic performance around the world are not driven by (human and physical) capital and labour utilisation (Caselli 2005), but rather by deep (total-factor-productivity-related) factors, related perhaps to historical accidents, culture, geography, and perhaps colonial and even pre-colonial traits.

Figure 1a. Persistence of Aggregate Economic Activity since 1950

1b.Persistence of Aggregate Economic Activity since 1970

Figure 2a. Persistence of Income Per Capita since 1950

2b. Persistence of Income Per Capita since 1970

Inspired by these facts, economists over the last 20 years have produced a vibrant corpus of research that moves decisively beyond an ahistorical view of comparative development by carefully scrutinising the role of historical events in shaping the observed (and growing) differences in prosperity across the globe. But how have economists gone about quantifying the effect of historical legacies on the various outcomes of interest? Given the interdisciplinary scope of these questions, economists have become increasingly willing to draw on neighbouring disciplines, including history, political science, environmental studies, sociology, ethnology, genetics and anthropology, and to explore long-standing hypotheses using rigorous econometric methods and formal modelling. This cross-pollination has produced new insights on the origins of distribution of income and wealth, both across and within countries. The goal of the three volumes of this eBook is to summarise the pathways this literature has established. Volume I focused on historical events that had global consequences. In Volume II we summarised research on the legacy of important historical events in explaining comparative development in Africa, India, China, and Australia. This Volume focuses on Latin and North America and in Europe.

The Americas – South America

The first part of Volume III discusses works on the deep-rooted factors of development in the Americas, covering the period from the colonisation of North and South America till World War II. Melissa Dell assesses the legacy of colonial forced labour practices in Peru as she examines the long-run effects of the mita system. She documents large adverse consequences of forced labour practices, a finding that has been echoed by more recent works in Africa [see the account by Sara Lowes and Eduardo Montero in Volume II of the deleterious long-lasting impact of forced labour in Congo Free State]. Felipe Valencia Caicedo talks about the long-lasting effects of missionary activity in South America via education and finds substantial positive effects of Jesuit missions on modern-day human capital and incomes. His findings support the view that historical investments in human capital can have long-lasting consequences, altering communal culture and individual behaviour (see also the chapter in Volume II by Cagé and Rueda). The impact on contemporary subnational institutions of sugar-cane and gold booms in Brazil is the subject of Joana Naritomi’s work, where the econometric exploration reveals that, within the constant de jure macro-institutional setting of Brazil, areas affected by these extractive episodes, and under stronger influence of Portugal during the colonial period, have worse outcomes today. [This research complements works on the colonial origins of comparative development (as summarised in Volume I by Daron Acemoglu and Jim Robinson).

The Americas – North America

For Christian Dippel the focus of study is the forced population resettlements of native North American tribes on reservations across the United States, leading to the imposed coexistence of groups that had, prior to this, been independent jurisdictions. Interestingly, he shows that the effect of forced coexistence was relatively small from 1970 to 1990, implying that more than two-thirds of the cross-sectional effect estimated in 2000 appeared after 1990, when local governance began to really matter on reservations. [This work is related to studies summarised in Volume II on the negative consequences of ethnic partitioning during the Scramble for Africa]. Suresh Naidu and Richard Hornbeck show how large environmental shocks can potentially alter long-standing patterns of political inequality and economic development, with their examination of the 1927 Mississippi Flood, which drastically altered black labour supply and forced white planters to transition to a mechanised agricultural economy. These findings reveal how historical environmental accidents may drastically alter the initial social and economic equilibrium of a given locality (James Fenske and Namrata Kala summarise “environmental economic history” in Volume I). Moving to the post-war era, anecdotal evidence suggests that German Jewish émigrés, fleeing Nazi Germany, revolutionised US science and innovation, and Petra Moser, Alessandra Voena, and Fabian Waldinger investigate this, via a comparison of changes in patents, per year after 1932, by domestic US inventors in the research fields of German Jewish émigrés with changes in annual US patents by domestic US inventors in the research fields of other German chemists.

Europe – Historical legacies

The second part of Volume III focuses on recent empirical works studying the long-lasting legacies of important aspects of European history. Luigi Guiso, Paola Sapienza, and Luigi Zingales test Robert Putnam’s influential conjecture tracing the origins of the sizeable North-South divide in economic performance in modern Italy back to the rise, in the Middle Ages, of the free city-states and conclude that they still seems to shape civicness and trust. Sascha O. Becker and Jared Rubin review research on the consequences of a defining event of European history over the last millennium: the Protestant Reformation. They focus on two channels through which the Reformation affected long-run economic development: human capital and governance. And suggest that, as well as a lasting positive effect on educational outcomes there was also a transformative effect on the manner in which Protestant polities were governed, since the Reformation undermined the capacity of the Catholic Church to legitimise rule and Protestant monarchs therefore turned to parliaments for legitimacy and resources.

Giuseppe Dari-Mattiacci and Enrico Perotti examine the legacy of another fundamental innovation: the establishment of limited-liability corporation. They trace the development of the fundamental elements of the corporate form over time; they discuss how the onset of colonial trade exposed the limitations of the pre-existing contractual system and spurred the legal establishment of the corporation. They then demonstrate that it was the Dutch East India Company (VOC), that produced the missing legal innovation, allowing long-term investment in the infrastructure of their fleet.

Europe – the burden of hatred

Several chapters of this eBook focus on the consequences and origins of anti-Semitism and the Holocaust. Nico Voigtländer and Hans-Joachim Voth explore the extent to which cultural transmission predisposes people to hate others in the context of anti-Semitism in Germany; their research uncovers a remarkable finding of cultural persistence: Towns and cities that persecuted Jews in the Middle Ages during the Black Death were also much more likely to show signs of anti-Semitism in the 1920s and 1930s. They then investigate the channels through which racial hatred can traverse the centuries and their findings suggest that, where financial self-interest is at variance with a hate-fuelled view of the world, persistence can be systematically lower. Daron Acemoglu, Tarek A. Hassan, and James A. Robinson shed light on the long-lasting economic and political effect of the persecution and mass murder of Jews in Russia by the Nazis during World War II and suggest that it cannot be accounted for by the direct effect of the Holocaust on the Jewish population, but may be due to its adverse effect on the social structure of the cities, particularly by lowering the size of the middle class.

Europe – Division and reunification

Remaining in Russia, Irena Grosfeld and Ekaterina Zhuravskaya explore how historical ethnic animosity may shape current attitudes by looking at Jews’ presence in (and eventual removal from) a designated area within Russia known as the Pale of Jewish Settlement. Exploiting a spatial regression discontinuity design, Grosfeld and Zhuravskaya find that current urban residents of the Pale area exhibit significantly higher aversion to markets and market reforms. This evidence is important, as they uncover the impact of history on contemporary beliefs and social norms that in turn shape development. Nicola Fontana, Tommaso Nannicini, and Guido Tabellini investigate how political attitudes have been shaped by historical events through focusing on the legacy of the resistance movement in Italy, active during World War II. The authors compare municipalities just above and just below the Gothic line (cutting Northern-Central Italy from West to East), where the battlefront between Germans and the Allied Forces remained stuck for about six months. Post-war election outcomes are starkly different across the Gothic line and the authors find that exposure to violence during WWII is robustly associated with a persistent increase in communist vote shares.

In the final chapter of the volume, Alberto Alesina and Nicola Fuchs-Schündeln exploit the separation and then reunification of Germany to shed light on whether different preferences across countries lead to different policies or if, in fact, different preferences are caused by different policies. Overall, their work provides strong evidence that individual preferences are deeply shaped by the political regime in which people live, pointing to crucial interaction between institutions and cultural attributes.